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Judy Shelton: Sound Money

“America needs a dollar that is once again an honest dollar, as good as gold.”— Jack Kemp

Jack Kemp was sometimes referred to as “Mr. Gold Standard” for his ideas on the need to anchor the dollar to a measure of value that was both enduring and universally recognized. Even if political pundits used the term in a derisive way – how crazy to imagine going back to a gold standard in these modern times – Jack Kemp never took it that way. He knew that the notion was sound at both the domestic and global level, an idea consistent with the political philosophy of Thomas Jefferson as well as the vision of Nobel economics laureate Robert Mundell.

As the United States today wrestles with fiscal dilemmas that threaten to downgrade its credit rating as an investment – even as our trade partners and allies accuse us of engaging in beggar-thy-neighbor policies of competitive depreciation of our currency to gain a trade advantage – it is more than nostalgia that prompts us to reconsider the ideas so boldly defended by Jack Kemp throughout his distinguished political career.

We need to once more find that lodestone, that reliable measure of value, on which to anchor the value of the dollar.

Americans need to know that their nation’s monetary unit of account provides an accurate and consistent measure, so that price signals convey true value to the marketplace. It’s the only way the real economy can function properly to maximize opportunity and deliver optimal levels of economic prosperity. At the same time, America’s role in the global economy will continue to erode along with the integrity of our currency if we do not reassert the fundamental notion that money is meant to serve as a tool of free enterprise – not an instrument of government policy.

How can both these objectives be achieved in a unified manner? How can we restore honest money at home while strengthening the role of the dollar as a global reserve currency?

By linking the dollar to gold, as Jack Kemp sought to do with rigorous adherence to global economic theory, the U.S. could establish a new position of leadership that would lay the groundwork for a restructured international financial architecture consistent with American values of economic freedom and personal responsibility. Nations willing to move to a gold anchor for their currencies would be acknowledging their commitment to free trade and individual opportunity based on a level playing field; no longer would currency gyrations undermine genuine competition and thwart authentic free market outcomes. No longer would financial capital be misdirected and the value of economic assets be distorted through manipulation of the monetary standard.

Congress is empowered through the Constitution to “regulate” the value of money, but this authority was conveyed in the same sense as the power to fix the standard of weights and measures – indeed, both of these responsibilities are described in the same sentence appearing in Article I, Section 8. Notably, that power is explicitly granted in terms of authorizing the right to “coin” money, not print it; the duty of Congress was to define the U.S. dollar in terms of a specific weight of gold or silver and with respect to foreign coin already circulating within the fledgling nation.

Thomas Jefferson proceeded to do so, writing in 1784: “If we determine that a Dollar shall be our Unit, we must then say with precision what a Dollar is.” By 1792, the value of the dollar was fixed through the Coinage Act at 371.25 grains of pure silver or 24.75 grains of pure gold. Furthermore, Mr. Jefferson argued that it would be a violation of the Tenth Amendment, going far beyond the enumerated powers described by the Constitution, to empower the government to issue “bills of credit” that had to be accepted as legal tender.

Obviously, we have moved far away from the principles of the Founders who early recognized the potential for abuse of the monetary privilege by government. Today, our nation’s money is issued by an agency so aligned with the fiscal interests of the U.S. government – the Federal Reserve stands ready to make unlimited purchases of Treasury securities – that any attempt to suggest it operates independently is simple not credible. No wonder people are flocking to gold as they flee government-supplied money.

The nexus between providing a stable monetary foundation for domestic growth and forging an international monetary order devoted to free markets and free trade is the one so often invoked by Jack Kemp. “Gold convertibility may not be fashionable,” he noted in remarks before the Federal Reserve Bank of Atlanta and Emory University in March 1982, “but I am convinced that it is imperative, for the simple reason that if we do not choose to remonetize gold, people in the market will progressively choose to demonetize the dollar.”

In calling for a reliable monetary standard, Kemp was always mindful of the moral dimension of sound money. “People trade with each other in time because they believe they will not be defrauded by a change in the currency,” he often stated. For Kemp, the restoration of an honest dollar with predictable and constant value over time would not only serve the best economic interests of the American people, it would also assist countries who “currencies and fates are tied to ours.” Most importantly, perhaps, it would help move the whole world toward liberalized trade and strong growth.

How best to achieve the objective of a sound dollar and a stable international monetary system? Kemp argued strongly for convertibility of Federal Reserve notes and credit into gold on demand and for establishing a system in which official international settlements are made in gold:

We need gold convertibility because it’s not enough to simply have a rule for monetary policy;
there must also be a mechanism for putting it into effect. The most stable monetary mechanism
we have seen was the classical international gold standard.

Kemp recognized that the same values and lessons that apply to whole nations striving to succeed within the global economy are also applicable to individual workers, savers, investors, businesses, and families. He was quick to note that people are creditors when they save for their children’s college education or for retirement. They are debtors when they borrow to buy a house or start a business. They deal with exchange rates when they travel or shop for an automobile – or when the local steel plant lays off workers because of imports. They experience the high cost of capital when they take out a car loan. They experience the depreciation of money when they buy food at the supermarket.

As Jack Kemp so insightfully realized, monetary issues are hardly remote from the daily experiences of most people. He saw monetary reform as a popular, blue-collar, bread-and-butter policy proposal – a winning political idea. At the same time, he had the foresight to comprehend that America’s leadership in the world should not be taken for granted; it requires us to adhere to core principles of integrity which extend to the reliability of our own monetary standard. As Kemp boldly affirmed in his 1988 presidential campaign speech:

I am a radical believer in the idea that the dollar should be so honest, so sound, so trustworthy,
so good, so predictable, so lasting in value, that it’s as good as gold.

Championing the cause of sound money was more than good politics, though. It was a matter of commitment to the highest ideals of a nation dedicated to growth, opportunity, and the advancement of human dignity. From Kemp’s perspective, the dependability of the dollar testified to the destiny of the nation. He believed the dollar should be as honorable and steadfast as the American idea itself.

(Ms. Shelton, senior fellow at Atlas Economic Research Foundation, is author of Money Meltdown: Restoring Order to the Global Currency System.)